Budget experts are cautiously optimistic about Michigan’s fiscal outlook after many were concerned the COVID-19 pandemic would lead to a long economic downturn , but their hope is contingent on more federal relief aid.
The current Fiscal Year 2021 budget is in better shape than what was predicted in August by more than $1.2 billion, but state Treasurer Rachael Eubanks says that even with “healthy growth,” the state is still in a “deep hole.”
There is an extra $700.8 million projected in the state’s General Fund, which includes spending for prisons, state parks, higher education, state police and other priorities. And the School Aid Fund (SAF), which primarily is for K-12 education, is estimated to have $528.3 million more in FY 2021 than projected in August.
When COVID-19 hit the state in March 2020, economists scrambled to predict how a pandemic that closed businesses, schools and public events would affect the economy while it was still happening in real time. The early estimates were grim.
State budget experts met Friday for the January Consensus Revenue Estimating Conference (CREC), where top officials from the Treasury Department and the nonpartisan House and Senate fiscal agencies agree to economic and revenue forecasts.
This will be used as the basis for Gov. Gretchen Whitmer’s FY 2022 budget, which she is expected to propose in the coming weeks. The next fiscal year begins Oct. 1.
Compared to predictions made during the May conference and slightly more hopeful predictions during a rare August conference, the outlook is seemingly better for Michigan for fiscal years 2021, 2022 and 2023, largely due to federal stimuli given to states throughout the last year.
“Though our revenue shortfall this year is not nearly as severe as we had feared, our economy is still in need of recovery and assistance from the federal government,” said State Treasurer Rachael Eubanks. “Undoubtedly, previous federal coronavirus relief funds helped soften the economic impact of the pandemic this last year, but more will be needed as we turn the corner.”
Eubanks said the $900 billion pandemic relief bill that was passed by Congress in December will “provide some much needed help in the short run,” but says that the state needs to proceed cautiously as they are expecting a multiple year recovery process.
Fiscal Year 2022 also is in better shape than August predictions by about $875 million — with $504.6 million more in the General Fund and $370.2 million in the SAF.
“While the pandemic has had a dramatic impact on our economy, the state of Michigan has outperformed national averages in a number of areas,” Eubanks said. “While still down more than $1 billion compared to before the pandemic, today the state’s revenues were raised upwards primarily due to direct and indirect impacts from the federal stimulus.”
In January 2020, prior to when the pandemic hit Michigan, the state was forecasting about $412 million surplus for Fiscal Year 2021.
But Eubanks is adamant that without public health remaining a top priority, economic recovery is unlikely.
“Public health and the economy go together. We will not have a normal economy again until the public health situation is under control,” she said. “That’s not to say that government restrictions don’t have any effects, they do. However, most of the research I have seen suggests that private precautions account for a larger share of the slowdown when the virus surges.”
However, Michigan House Appropriations Chair Thomas Albert (R-Lowell), who has been a proponent of Michigan’s COVID-19 business restrictions to be lifted, says the brighter economic outlook is “wildly unsustainable” because it is “artificially propped up by federal COVID relief, increased unemployment benefits and other temporary measures.”
“There won’t be a real economic recovery – and the state budget won’t be truly healthy – until our economy is reopened. Our governor does not have a clear and transparent plan that is based on public data,” Albert said. “Her COVID restrictions remain arguably the harshest in the nation, and Michigan families – struggling to make ends meet – are the ones paying the price.”
Unemployment surged, but state revenues didn’t feel the hit
One of the greatest challenges of the coronavirus pandemic was its effect on employment as businesses downsized their staffs, shut down for months or adjusted to meet the governor’s executive orders.
Michigan’s unemployment rate forecast for 2020 is 9.8%, more than double what it was in 2019 when the unemployment rate was 4.1%.
Unemployment rates are expected to improve in the coming years, but compared to 2019, they are still high. Economists predict the unemployment rate to be 7.1% in 2021 and 6.2% in 2022.
Despite the major loss in jobs in Fiscal Year 2020, the state’s revenue was unusually unreflective of this.
“Generally, when people lose their jobs, you see wage income fall, you see transfer payments go up and you see personal income fall. In 2020, all three rose,” said David Zin, Senate Fiscal Agency chief economist.
Zin said the rise is largely due to new stimulus programs, including the Paycheck Protection Program (PPP), stimulus checks and stimulus from the Federal Reserve.
Michigan League for Public Policy CEO Gilda Z. Jacobs said that while the consensus is better than it could be, Michiganders are still being underserved and the state revenues are “woefully behind.”
“Michigan has systematically disinvested in, and at times slashed funding for, the services our residents truly rely on, and many areas of our state budget have still not recovered … These fiscal and policy decisions have adversely hurt residents with lower incomes and Michiganders of color, creating disparities that have only increased due to the COVID crisis,” Jacobs said. “To invest in the state’s most pressing needs and ensure full and equitable economic recovery and future growth, the state will require more federal relief funding.”